Economy grew slowly in first three months

Published Saturday, May 26, 2001

WASHINGTON (AP) -- The U.S. economy grew far more slowly in the first three months of this year than the government previously estimated, reflecting a steeper drop in business investment in computers and other equipment and weaker consumer spending.

The Commerce Department reported Friday that gross domestic product -- the country's total output of goods and services -- grew at an annual rate of just 1.3 percent in the January-March quarter.

The anemic showing represented a big downward revision from the government's estimate one month ago that the economy expanded at a rate of 2 percent, a figure that astounded analysts and raised hopes for a rebound.

Stocks were lower in early trading Friday. After the first hour, the Dow Jones industrial average was down 88 points and the Nasdaq index had lost 34 points.

The latest reading on GDP, which is considered the broadest measure of economic health, was slightly weaker than the 1.4 percent growth rate many analysts were forecasting.

''It was remarkable that growth was positive at all,'' said Paul Kasriel, chief economist at the Northern Trust Co.

Federal Reserve Chairman Alan Greenspan, in a speech Thursday, said the worst of the slowdown that has gripped the country since the second half of last year may not be over. He signaled the Fed stands ready to do more to avert a recession.

In an effort to keep the economy afloat, the Fed slashed interest rates five times this year by a total 2.5 percentage points, driving borrowing costs for consumers and businesses to the lowest level in seven years.

The 1.3 percent first-quarter growth rate was a slight improvement over the meager 1 percent showing in the fourth quarter. But economists project the economy is losing altitude in the April-June quarter because of sluggish consumer and business spending.

In another report, orders to U.S. factories for costly manufactured goods, such as cars, expected to last at least three years plunged in April by a bigger-than-expected 5 percent, following a 2.2 percent increase the month before.

The weakness was widespread. Orders for transportation products fell by 9.3 percent. Demand slackened considerably for computers and electronic products, including a whopping 31.9 percent decrease in orders for semiconductors. Orders for machinery dipped 2.8 percent.

The economic slowdown and higher energy costs are taking a toll on corporate profits. After-tax profits of U.S. corporations fell in the first quarter by 3.1 percent, following a 4.3 percent drop in the fourth quarter, the GDP report showed. The last time there were back-to-back declines in corporate profits was in the third and fourth quarters of 1998. Greenspan, in his speech, described the pressure on corporate profit margins as ''unrelenting.''

The economy's record expansion have been powered by business investment, particularly in high-tech equipment, and robust consumer spending, which accounts for two-thirds of all economic activity.

In the first quarter, business investment in computers and other equipment, decreased at an annual rate of 2.6 percent, a bigger decline than the 2.1 percent rate the government previously estimated. In the fourth quarter, spending fell at a rate of 3.3 percent.

In announcing its latest interest rate cut on May 15, the Fed cited as a worry such weak spending by businesses.

Another huge drag on growth came from a continuing effort by businesses to desperately reduce an overhang of unsold goods. The drop in inventories subtracted 2.96 percentage points from growth, a bigger drag than previously thought. In the fourth quarter, the drop in inventories shaved 0.6 percentage point from growth.

Consumer spending grew at a rate of 2.9 percent in the first quarter, weaker than the 3.1 percent rate previously estimated but slightly stronger than the 2.8 percent rate in the fourth quarter.

An improved trade performance added 1.1 percentage points to economic growth in the first quarter but not as much as the 1.4 percentage points increase the government previously estimated.

An inflation gauge tied to the GDP rose at an annual rate of 3.2 percent in the first quarter, reflecting higher costs for services such as medical care and for natural gas and electricity. That was up from a 1.9 percent rate in the fourth quarter. Still, Greenspan, in his speech, said inflation doesn't pose a current risk to the economy.

But Kasriel was more concerned by the latest inflation figures: ''I would conclude this has a whiff of stagflation,'' he said, referring to the twin evils of slow growth and price increases.

All the changes in the first quarter left overall GDP rising at a 1.3 percent annual rate. That amounted to an extra $30.8 billion output at an annual rate after adjusting for inflation, pushing total GDP to $9.4 trillion. Before adjusting for inflation, economic output in the first quarter was growing at an annual rate of $10.2 trillion.